UK economy contracts at fastest rate since 2009

The pound has slumped on news the UK economy is falling at its steepest rate since the height of the global financial crisis, signalling a 0.4 per cent contraction in the economy in Q3, according to IHS Markit data.

The UK purchasing managers index figures have been worse than analyst expectations, with the composite output index, which covers services and manufacturing, hitting an 87-month low at 47.7 in July compared to 52.4 in June. Consensus estimates expected the figure to sit at 49.0.

UK services reached an 88-month low at 47.4, compared to 52.3 in June. Figures below 50 can signal a recession.

In both services and manufacturing, employment readings were below 50, indicating job layoffs may follow.

The pound slipped to $1.3121 as the PMI figures were released, against the day’s high of $1.3282.

Chief UK and European economist at IHS Markit Howard Archer says the figures may reflect the initial shock of Brexit and figures released in the months ahead would reveal if that sentiment was set to last.

But Archer says it is worrying that the combined new orders index saw the sharpest monthly drop since the surveys began. The services business expectations index also experienced its largest decline on record.

The data, covering 12-21 July, is set to bolster the Bank of England’s likelihood of cutting rates at its meeting on 4 August. A lack of data prompted it to take no action at its first meeting following the UK’s Brexit vote.

Group chief executive at the Chartered Institute of Procurement & Supply David Noble urged policymakers to take swift action to stop further decline.

Noble says weak sterling had driven a “steep rise” in input prices, but had also boosted exports. “However, with a subdued global economy, it is not yet clear whether these opportunities will materialise in the long term.”

Russ Mould, investment director at AJ Bell, says the data is worrying when combined with construction data released in June that sat at 46.0, as it suggests the EU referendum vote has knocked corporate sentiment.

Mould points out that that all three surveys had been low before 23 June, so the economic outlook could still look worrying if the initial concern surrounding Brexit did prove to be temporary.